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October 4, 2013

Half of Schwab’s ETF Investors to Boost Holdings Over Next Year

Nearly one in 10 ETF investors now hold 50% or more of their portfolios in ETFs, Charles Schwab’s study shows

A Charles Schwab branch. (Photo: AP)

Half of exchange-traded fund investors in the 2013 Charles Schwab ETF investor study said they plan to increase their ETF holdings over the next year, representing a 22% rise in demand from 2012, Schwab reported Thursday.

Nearly one in 10 investors, or 9%, now hold 50% or more of their portfolios in ETFs, more than double the 4% reported last year. Cost and fees continued to be critical factors when investors make ETF buying decisions, according to the survey that studied ETF investors both in and outside of Schwab's platform, but worries about possible hidden fees topped investors’ concerns about expense ratios and trade commissions.

“Demand is up across the board, and investors who own ETFs appear to be more interested in the product than ever,” said Beth Flynn, vice president of ETF platform management at Charles Schwab, in a statement. “We’re seeing less discussion of ‘if’ and more about ‘how’ investors will buy and use ETFs. We’re seeing an upward shift in sophistication among ETF investors, and a hunger to learn more.”

The 2013 ETF Investor Study, Schwab’s third annual survey of ETF investors, is an online survey of more than 1,000 individual investors between the ages of 25 and 75 with at least $25,000 in investable assets. Conducted by Koski Research in August, the survey focuses on investors who have purchased ETFs in the past two years and/or are considering purchasing ETFs in the next two years.

A Merrill Lynch retail ETF analyst in attendance at the Morningstar ETF Invest Conference 2013 in Chicago who was familiar with the Schwab study said Friday that he the survey results were useful. “They provide data points about ETF investors,” he said, noting that whether or not an investor buys ETFs comes down to two factors: cost and education.

Similarly, the Schwab study found that investors reacted strongly to lack of transparency when it comes to cost, with 94% saying that understanding an ETF’s total cost is important. Clarity around a fund’s redemption fees or other hidden fees was considered the No. 1 cost factor, with 71% calling it extremely important. That factor ranked ahead of expense ratios at 61% and trade commissions at 54%.

Investors surveyed also pointed to the importance of education, with the study revealing that three in 10 investors said they still need to know more about ETFs in order to invest more in them. Respondents are most interested in learning more about ETFs’ tax implications, followed by a desire to understand how to best use ETFs in a portfolio.

The top benefit of ETFs, according to study participants, is that they can be bought and sold like stocks. More than half, or 53%, said they believe ETFs are best suited for those in the market for the long term, while 40% felt they were well-suited for active traders.

As for ETFs most in favor with investors these days, sector funds ranked first, with equity and international ETFs rounding out the top three. Among specialty ETFs specifically, respondents are most interested in purchasing commodity funds.

Flynn, who attended the Morningstar ETF Invest Conference, said Friday that another indicator of interest in ETFs comes from investors’ use of the Schwab ETF Portfolio Builder, which has not yet been advertised yet is already being used by 5,000 clients.

“That shows an appetite for building a long-term ETF portfolio,” said Flynn, who is the Portfolio Builder’s business owner. ETF Research managing director Michael Iachini designed the self-directed tool for retail investors with a minimum investment of $5,000, offering a portfolio of eight ETFs based on five risk tolerance profiles from conservative to aggressive.

Schwab had $179.3 billion in ETFs custodied on its platform as of Sept. 30. Schwab ETFs, including the six new Schwab Fundamental Index ETFs launched in August, had $14.2 billion in assets as of Sept. 30.